22 Nov 2012
This is a financial website and not the place for political ranting but loans to fund English university education represent investments in children’s futures. Unfortunately, alarmingly and disgracefully, the terms are such that any child who is sold one is likely to be financially handicapped for life.
Sub-prime loans have high interest rates to compensate for an expected high rate of default; but those high rates kick in as the loan matures; initially borrowers are offered so-called “teaser” rates to lure them into signing up. The loans offered by Student Finance England appear to me to match this description but they have any extra twist that is not normally available to sub-prime lenders – they are being marketed to children.
If you think I am succumbing to the emotion of anger at this point, check out the website – http://www.studentfinanceengland.co.uk/ – there you can play an online game called “Teacher’s pets” in which you have to save your teacher by defeating the “Pignorants” by answering questions such as:
Which of the following companies can you get student finance from?
A – Bank of England
B – Money Saving Expert
C – Argos
D – Student Finance England
As an aspiring Pignorant, I will offer a few facts that will make us ask ourselves what it is that 17 and 18 year olds have done to deserve this. For students at English universities who start after September 2012, the scheme that applies is Income Contingent Repayment Plan 2.
The loans attract interest of RPI +3% from day one – so with RPI currently at 3.2%, that’s 6.2%. A student who needs to borrow £17,000 a year for a three course will borrow £51,000 but owe just over £54,200 when he or she leaves university.
Repayment starts only when the graduate begins to earn over £21,000. Except, when we say repayment, what we really mean is the first steps to meet interest payments on a debt that continues to grow. The continuing interest rate depends on how much the graduate is earning. The more that he or she earns, the higher the interest rate.
Payments are entirely dependent on income. Student Finance England simply takes 9% of gross salary over £21,000. What this means is that someone earning £30,000 will pay just under 3% of total gross salary, someone earning £50,000, just over 5% and someone earning £100,000, just over 7%. Note that this is calculated on gross salary but has to be paid out of net income. Those who earn £100,000 from employment today pay c.£38,200 in income tax and national insurance. Assuming at RPI stays at c.3%, they will make annual payments of c.£7000 out of net income of £61,800. That’s more than 11% of net income. How’s that for a graduate tax?
If you regard your home as your pension or your inheritance, this is the generation that might be supposed to be buying it from you – except that they will struggle to buy your car let alone your house. The property ladder has just been pulled up out of reach. Bear in mind that other lenders will take into account liabilities that have precedence and adjust their terms accordingly. No cheap mortgages for these kids.
If you are wondering if and when these student loans are paid off, the answer is that, for most, they probably will not be. After thirty years, they are forgiven.
If our theoretical graduate who borrowed £51,000 starts work at once on a generous starting salary of £30,780 and achieves an annual 6% remuneration increase against our assumed 3% RPI growth, the loan will be paid off in year thirty at which time his or her salary will be £166,800 and the total repayment will have been £162,300. The year in which the principal will have started to be paid off will be year 20 – until then, the sum owed will have continued to grow.
Last month the Higher Education Policy Institute claimed that the cost of the funding scheme ” will be much higher than has been admitted, both because repayments of loans is (sic) likely to be much lower than claimed and also because the inflationary impact of the fees will mean that the level of benefits will be increased.” All the news media that I can find reported this as a story about the state of public finances and the famous deficit. No one seems to have followed it up by asking why it is that the repayments are likely to be lower than expected, even though the answer is obvious to anyone who looks at the numbers – these are sub-prime loans, sold to children.This is an investment blog so here is my investment advice. If you want your children to go to university, don’t let them take out a student loan. Mortgage your house and effectively bring their inheritance forward. Somehow raise the money, even if it burdens you. Financially screwing our children is not only immoral but also a very poor investment.